Anthony Foley: Do not expect too much from first step of many government rebuilding blocks

Anthony Foley: Do not expect too much from first step of many government rebuilding blocks
Last week, Tánaiste and Minister for Business Trade and Employment Leo Varadkar said the purpose of the July package would be to save jobs and businesses

The Programme for Government seeks to “reignite and renew the economy”.

The intended approach is twofold. The “July Stimulus” will include a series of short-term and immediate actions to support the economy.

Then, in conjunction with Budget 2021, a National Economic Plan will be published in October to identify the long-term approach to restore employment.

The programme for Government identifies relatively modest but essential aims for the July Stimulus including, the identification of a pathway for the future of the temporary wage subsidy, clarification of the future operation of the Pandemic Unemployment Payment, establishment of a SME group, initiation of a high-level review of the economy in terms of growth potential as preparation for the October economic plan, the enactment of legislation to underpin the new Credit Guarantee Scheme, a review of the Business Restart Grant, the consideration of additional grant support for SMEs, improvement of the impact of MicroFinance Ireland, review of the opportunities facilitated by the European Investment Bank, review of the role of the Irish Strategic Investment Fund, clarification on commercial rates relief and the creation of a code of conduct between landlords and tenants for commercial rents.

This list mainly refers to measures which already exist or have been announced but which require clarity on their future operation. Clarity matters because, for example, the wage subsidy scheme is due to finish at the end of August.

The programme does refer, however, to the possibility of additional sector-specific measures for activities such as hospitality, retail, entertainment, arts and leisure. Both workers and employers need greater certainty on the duration of supports.

Anthony Foley is emeritus associate professor of economics at Dublin City University Business School
Anthony Foley is emeritus associate professor of economics at Dublin City University Business School

The usual dominant issue in a recession is a lack of aggregate demand, but the Covid-19 generated recession has created major supply problems also and worsened the commercial model and cost base for most enterprises.

If the economy or a sector cannot respond to an increase in demand, because of public health-related capacity constraints, there is no point in stimulating the economy - or the sector - through boosting aggregate demand.

For example, health policy does not want incoming international tourists from the US and the UK, so there is no point in implementing measures to attract these tourists in the next few months even if that was possible.

However, the current capacity of hotels - even though reduced from pre-Covid times - is not being fully taken up by domestic tourists, so there is a basis for stimulating demand for domestic holidays.

The capacity of the economy to provide goods and services has been reduced by public health measures. If this reduced capacity is being fully utilised there is no point in introducing measures to stimulate additional demand. If, however, there is still insufficient demand for the reduced supply capacity, there is a case for demand stimulation.

The early economic policy response to Covid by the Government had two main objectives. It sought to protect the income levels of newly unemployed people through a relatively high unemployment payment. It tried to prevent firms from collapse and permanent closure, and to stay alive pending the resumption of “normal” economic life.

The July stimulus should retain and, improve where necessary, the Covid enterprise support measures such as wage subsidies, credit, grants and rates relief. Commitment to their maintenance over a long time period should be given, at least until the end of the second quarter of 2021 unless virus conditions improve in the meantime.

The survival of enterprises should continue to be a policy objective. 

Reasonable income maintenance for workers should also continue to be a policy objective. 

Consideration will have to be given to eligibility for these enterprise supports such as sales performance or impact of mandatory physical distancing, closure and capacity regulations.

SMEs should face conditions which are easier to prove while large firms should face more stringent assessment.

Decisions on the long-term viability of enterprises and sectors will eventually have to be made should the current virus-related operating conditions continue indefinitely but it is too early for that in the context of the July Stimulus.

There is scope for a more radical approach in the July stimulus than indicated in the Programme for Government and this may be intended by the Government. 

We need to build thousands of social and affordable housing units. A significantly frontloaded ambitious construction programme could be initiated in an accelerated manner subject to the availability of skilled labour.

Availability of borrowed finance is not a problem, and, in any event, when completed the housing units would generate income. 

The same possibility exists for environment-enhancing measures. The impact of Vat rates on the supply and cost positions of enterprises which have to cope with severe physical restrictions should be acknowledged and should be reduced on a temporary basis -especially in labour-intensive sectors.

This is a different issue to the role of Vat rates on prices and demand. 

The July stimulus should start to acknowledge the likelihood that many sectors will not regain their pre-Covid levels of employment and a substantial skills programme should be announced, in principle, pending details in the October national economic plan. 

A substantial effort should be made to promote domestic tourism. Consideration could be given to tourism-related vouchers funded by the Government.

Should overall macroeconomic circumstances suggest an aggregate demand stimulus is appropriate, a time-constrained temporary Vat refund scheme could be introduced for consumers to encourage the spending of the large additional forced savings of 2020.

It will take years to recover the Covid economic losses but the July stimulus can begin the process, one step of many.

 - Anthony Foley is emeritus associate professor of economics at Dublin City University Business School

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